This forum has been an immense help to my family, but I do find myself getting lost in all the debate over factor tilts/tilting away from market-cap weighting or anything that shifts a stock portfolio away from the closest possible representation of the total U.S. stock market or the global stock market as a whole. It seems like an endless argument with no good answer. I prefer simplicity, but to be completely honest I prefer simplicity because I really don't understand the debate. Is there any situation where one can reliably predict the future of a specific sector/value/growth/small/mid/large cap etc. of the market and beat the market overall? In other words, over the long term (5+yrs) am I better off just not worrying about all the debate and just trying to mirror the total stock market until the day I sell in retirement?

Only invest it what you understand as even if tilts, factors, derivatives, commodities, astrology predictions whaterver are better, you would have to use them appropriately. That includes holding an asset that in the best case might underperform for over a decade. There are worse things that total stock market or S&P 500. Ignore the noise and just buy and hold.

Rowan Oak wrote: Is there any situation where one can reliably predict the future of a specific sector/value/growth/small/mid/large cap etc. of the market and beat the market overall? In other words, over the long term (5+yrs) am I better off just not worrying about all the debate and just trying to mirror the total stock market until the day I sell in retirement?

I think this is the important point. No one can reliably predict anything. Even if they did, was that luck or skill? There's no long term track record of successful predictions, so even if you get it right a few times, the odds are against you the longer you try. Even experts (economists, academics, etc.) haven't been any good at predicting things over relatively short periods of time (like one year predictions). The longer the time period, the less reliable any predictions are.

Larry Swedroe does this for us every year checking to see how the predictions of the so called experts were. The results are disasterous. Here's some links to articles by Swedroe:

My response may be a bit non Boglehead-ish, but I think there is a "yes, but no" kind of answer about predicting the markets. I think most people on this forum would agree with me that in general, market predictions are bunk. Yet even Bogle himself will reset expectations at least, on the basis of 10 year market return outlooks. At some level, virtually all of us are predicting that 1) Stocks will maintain their risk premium at some level, and 2) bonds will continue to work as a good offset to stocks within a portfolio (or else they use bond ladders.) I think the slice and dice approach just goes one level deeper into theory, and at the same time, one level riskier because the theory itself is not comprehensively accurate. The idea is that some segments of the market have historically out-performed the market as a whole. Tilting to those segments can increase both return and risk. If you diversify properly, maybe you can even get some of those returns for a comparitively reduced amount of additional risk... or you can blow up your portfolio as happened with LTCM in 1998.

I buy into the latter thinking, and I've made that bet with my portfolio, but I know it could all change (as it has with some strategic approaches in the past.) There's no way to know which is a better approach in the FUTURE. All we do know is there are some slice and dice combinations that have yielded slightly better results in the past (and some that have yielded worse results); and we also know that past returns are no guarantee of future results; and we know that some segments of the market that have outperformed can suddenly stop outperforming; and we know that some segments of the market that outperform can underperform for a decade or so before rebounding, making it hard to stick with that strategy in your own portfolio. I also expect that the basic 3 fund portfolio has a better record of investors sticking to it, because any slice and dice portfolio has greater potential to underperform for longer periods. If you don't feel like you understand it, it's best to stick with your salad, steak and potatoes. Adding garlic to your potatoes may work or may not, but in the end, it's not all that relevant; you still get a pretty good meal. And I'm fine with getting schooled by those with more experience or a better perspective on the issue, that's one reason I'm on this forum.

I tilt to small and value with a stock heavy portfolio (97%), and I do so as a way of increasing risk and increasing expected returns. That's really what I hope to accomplish with my tilt. I also overweight EM for the same reason.

You can diversify across factors if desired, and multifactor ETFs are starting to become available to the unadvised masses. I own one myself.

My opinion is that nobody knows nothing and that there are a large number of portfolios or strategies, of which you might as well choose based on personal taste because nobody can be sure which is best. Thirty years from now you will know which had the highest return, but you still won't know which was best because you won't know whether it was really a better strategy or whether it was just the luck of the 30-year draw.

I would also throw into this marketing considerations. If you think about it, there is not much money to be made in cap-weighted broad-based index funds with expense ratios of 0.10%... and Vanguard is a dominant player in that market. In the mutual fund space, there are strong incentives for mutual fund companies to convince you that they have something that is a little different and a little better... so that they can charge you 0.28% for a Wisdomtree Earnings 500 Fund, or 0.45% for a Fidelity Large-Cap Enhanced Index Fund, or RAE Fundamental PLUS Fund with 0.79%. Let me be very clear: there might be something to it, and those funds might be better for you, even after expenses. They might be a win-win. More likely they are a win for the fund company and a tie for you. Or possibly a win for them and a loss for you. In any case, it is a win for them, and that explains why they are motivated to market them to you.

Since you have dozens of fund companies selling you their own thing which is different from market-cap weighted indexing, you appear to have an eerie consensus, by everyone who isn't Vanguard, that "anything is better than cap-weighting."

Advisors, too, are interested parties. Advisors can earn their fees in many ways, but to the extent that you are turning to them for investment advice, you are not likely to value it unless it is something different, more complicated, and clearly involving more expertise than you have yourself.

What this means is that you need to allow for the likelihood that most of the advice that reaches you is skewed in the direction of more complicated strategies that are different from "buy a total U.S. stock market index fund, an international stock index fund, and a U.S. bond index fund and then leave them alone." Above material retracted, avalpert is right (below).

Last edited by nisiprius on Sun Jan 08, 2017 6:28 pm, edited 2 times in total.

Rowan Oak wrote:This forum has been an immense help to my family, but I do find myself getting lost in all the debate over factor tilts/tilting away from market-cap weighting or anything that shifts a stock portfolio away from the closest possible representation of the total U.S. stock market or the global stock market as a whole.

Rowan Oak:

I also get lost in all the debate (and I was chief of the financial division of S. Florida SBA).

Before shifting "a stock portfolio away from the closest possible representation of the total US stock market or the global stock market as a whole," read this:

nisiprius wrote:My opinion is that nobody knows nothing and that there are a large number of portfolios or strategies, of which you might as well choose based on personal taste because nobody can be sure which is best. Thirty years from now you will know which had the highest return, but you still won't know which was best because you won't know whether it was really a better strategy or whether it was just the luck of the 30-year draw.

I would also throw into this marketing considerations. If you think about it, there is not much money to be made in cap-weighted broad-based index funds with expense ratios of 0.10%... and Vanguard is a dominant player in that market. In the mutual fund space, there are strong incentives for mutual fund companies to convince you that they have something that is a little different and a little better... so that they can charge you 0.28% for a Wisdomtree Earnings 500 Fund, or 0.45% for a Fidelity Large-Cap Enhanced Index Fund, or RAE Fundamental PLUS Fund with 0.79%. Let me be very clear: there might be something to it, and those funds might be better for you, even after expenses. They might be a win-win. More likely they are a win for the fund company and a tie for you. Or possibly a win for them and a loss for you. In any case, it is a win for them, and that explains why they are motivated to market them to you.

Since you have dozens of fund companies selling you their own thing which is different from market-cap weighted indexing, you appear to have an eerie consensus, by everyone who isn't Vanguard, that "anything is better than cap-weighting."

Come on, this is unfair and a distraction from the actual question. Vanguard offers tilted funds at low cost too - so there is no need to run to the red herring of companies trying to get expenses - heck there are plenty of high expense total market funds out there too, does that prove that investing in total market is just a win for them and a loss for you?

Yeah, no one knows for certain what portfolio is the best for the future - yet you still make an actual determination of your bond/equity mix, don't you? So maybe you aren't as convinced by the evidence for other risk premiums as you are for beta - but that doesn't warrant pretending like there aren't real reasons and everyone is just guessing or trying to grift you.

In the "Final, Definitive Thread on Value", (viewtopic.php?t=96441), one of the [pretend] posters pretty much kills the discussion when they point out that the question of whether to tilt ranks about 8th out of the 10 most important points in investing. Saving a bunch, taking an appropriate amount of risk, staying the course, and keeping fees low are far more important.

In investing the perfect is generally the enemy of the good. What seems like the perfect allocation is different from year to year, which results in chasing various fads or the latest pieced of "peer reviewed, academic research, the benefits of which you can only access by investing in a fund that is exclusively available to my advisory firm."

However, I will say that I think some here go awry in the cases where they claim that cap-weighing is the one correct way to do things. It's not. It's a very reasonable way and solves an awful lot of practical implementation issues. But that doesn't make it "correct" or "true."

There is a lot of debate here about whether one can predict what segments of the market will do the best. I think you can make such bets with about 60/40 odds; I personally can't go along with those to claim that stocks with X,Y, and Z characteristics will beat the market with 90% probability over the long term.

Larry Swedroe has made quite the argument for at least tilting to small value. I like the idea even more for international small cap tilts, since it's been said that they should be less correlated to what's happening in the USA, along with having higher expected returns.

avalpert wrote:...Come on, this is unfair and a distraction from the actual question...[things are what they are but] that doesn't warrant pretending like there aren't real reasons and everyone is just guessing or trying to grift you.

I have a problem with the common response to this question which is typically along the lines of "nobody knows what will perform better until after the fact". However that sometimes strikes me as a bit of a cop-out because of course nobody knows...but probability does matter. Some extremely respected investors on this forum, including people like Rick Ferri for example...seem to believe that a probability exist that SCV will outperform, and tilt for that reason.
I guess the question isn't whether something WILL outperform, but more-so whether something SHOULD outperform. So are people who don't believe in tilting saying thats its a virtual 50/50 proportion, it might/it might not? I have like a 35 year horizon, maybe a 40 year horizon (I'm 25). Is it really that unreasonable to believe that a SCV Portion will outperform large caps over a 40 year period? I find it interesting that even within this forum...there isn't much fundamental agreement on this issue...and there seem to be really smart people on both sides of it.

Rowan Oak wrote:This forum has been an immense help to my family, but I do find myself getting lost in all the debate over factor tilts/tilting away from market-cap weighting or anything that shifts a stock portfolio away from the closest possible representation of the total U.S. stock market or the global stock market as a whole. It seems like an endless argument with no good answer.

I say for you, no don't tilt.

Why?

You have to be firm in your conviction to endure the uncertainty after periods of underperformance.

There are those here, well read and informed, who allocated to international (not an over allocation - not even market cap allocation) and have reduced it as international has not performed well in recent years. You don't want to do that with a value tilt.

So overall, the risk may or may not be worth the benefit. There is risk the tilts won't outperform in your horizon and there is the risk you won't be able to maintain the tilts.

Those are the same risks for any investment actually ...

The decision isn't make or break for you***. How much you can contribute is make or break.

*** unless you were a Japanese investor during their peak until now -- have a value tilt would have saved you. That is kind of an extreme though and maybe remote land, gold, food, fuel, guns, ammunition and medicine for a total breakdown is the best investment (though that is most likely too extreme). We simply can't really know the optimal allocation in advance. Pick something reasonable that you can stick with.

SpartanBull wrote:I have a problem with the common response to this question which is typically along the lines of "nobody knows what will perform better until after the fact". However that sometimes strikes me as a bit of a cop-out because of course nobody knows...but probability does matter. Some extremely respected investors on this forum, including people like Rick Ferri for example...seem to believe that a probability exist that SCV will outperform, and tilt for that reason.
I guess the question isn't whether something WILL outperform, but more-so whether something SHOULD outperform. So are people who don't believe in tilting saying thats its a virtual 50/50 proportion, it might/it might not? I have like a 35 year horizon, maybe a 40 year horizon (I'm 25). Is it really that unreasonable to believe that a SCV Portion will outperform large caps over a 40 year period? I find it interesting that even within this forum...there isn't much fundamental agreement on this issue...and there seem to be really smart people on both sides of it.

It's not so much that the SCV tilt won't outperform. Riskier assets should provide higher returns and small cap is riskier than large cap and value is riskier than growth. But the problem or question is whether or not people will adequately capture the value and/or small cap premiums.

Firstly, Larry Swedroe and Paul Merriman have claimed that Vanguard's small and value funds are not small and valuey "enough". Fair point, but not everyone can access DFA funds because they don't have large enough portfolio's (yet) or DFA is not available in their 401(k). So will people truly capture the small and value premium? Depends...are they tilting with Vanguard or DFA? With Vanguard...maybe the tilt worked out...but maybe if they were with DFA they would have captured the "entire" premiums (above what Vanguard got them).

Secondly, the problem with the tilts is that many people bail on their strategy rather than see it through. They get frustrated in the years when they underperform the market (experience tracking error) and bail before they capture the premiums. And I believe Larry Swedroe has said (at least with value) that it's a behavioral story...meaning the reason it works is because people lose faith, give up, give up on value (and that drives down prices which benefit buyers, not sellers)...but those who are patient (and buy especially when no one else wants them) will eventually capture the premium. I seriously doubt all but the most ardent believers in value and small would have stuck with their tilts through the 90s when large and growth dominated for a very long stretch up until 2000.

Finally, I do think timeframe matters. If you're in your 20s and you can honestly say you won't stray one iota from your tilted portfolio over the next 40 years (who really can say honestly what they will or will not do over the next 40 years??), then go for it. But for many of us, we've come upon the research a little later in our working lives and by the time we're convinced of tilting, we're already starting the process of decumulating assets, or at least lessening the risk as we glide into retirement two decades or less and are increasing our bond portion, not our equity portion. And there has been evidence that over 20 year periods or less the tilting strategy hasn't made as big a difference as it would have over 40 years. I know Larry and/or Paul will say there's never been a 15 year period where this tilting strategy didnm't outperform "the market" but it's still a risk of underperforming the market and for some, that's not worth it. Better to know you're guaranteed to get the market, rather than possibly underperform it.That's my $.02 worth.

"Invest we must." -- Jack Bogle |
“The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

arcticpineapplecorp. wrote:
Finally, I do think timeframe matters. If you're in your 20s and you can honestly say you won't stray one iota from your tilted portfolio over the next 40 years (who really can say honestly what they will or will not do over the next 40 years??), then go for it.

Are people reducing their tilts as retirement approaches?

Given that can underperform for so long, is that wise? I plan to hold mine until I am 80, but maybe longer.

Growth has a higher volatility anyway doesn't it. I think Bogle originally created Growth and Value funds to allow concentration in Growth while young and then shift into the safety of value when older ... so I don't see the need to reduce Value exposure [of course Bogle points out that there's not difference in performance - but I wouldn't expect any from a market cap weighted division ... growth stocks will end up on the value side when it booms and your accounting will get messed up]

arcticpineapplecorp. wrote:But for many of us, we've come upon the research a little later in our working lives and by the time we're convinced of tilting, we're already starting the process of decumulating assets, or at least lessening the risk as we glide into retirement two decades or less and are increasing our bond portion, not our equity portion. And there has been evidence that over 20 year periods or less the tilting strategy hasn't made as big a difference as it would have over 40 years. I know Larry and/or Paul will say there's never been a 15 year period where this tilting strategy didnm't outperform "the market" but it's still a risk of underperforming the market and for some, that's not worth it. Better to know you're guaranteed to get the market, rather than possibly underperform it.That's my $.02 worth.

Even if you reduce equities, why the need to reduce the % of your tilt?

in_reality wrote:
Are people reducing their tilts as retirement approaches?

This isn't necessary and it's not the approach I will take. One can hold more fixed income to reduce risk.

I think arctic meant if you don't have greater than 20 years of investing lifespan, it's too late to start that tilt now. If a 45 year-old decides he/she wants to start doing an SCV tilt, it may never manifest itself during his/her investing life.

arcticpineapplecorp. wrote:
Firstly, Larry Swedroe and Paul Merriman have claimed that Vanguard's small and value funds are not small and valuey "enough". Fair point, but not everyone can access DFA funds because they don't have large enough portfolio's (yet) or DFA is not available in their 401(k). So will people truly capture the small and value premium? Depends...are they tilting with Vanguard or DFA? With Vanguard...maybe the tilt worked out...but maybe if they were with DFA they would have captured the "entire" premiums (above what Vanguard got them).

I don't think any long-only fund can capture the entire value premium, not even DFA. I think Larry said about 60% (?) was the maximum one should expect. Non-DFA funds can do, but one would need to own more of a less "valuey" fund if they wanted more exposure to the potential premium, and maybe a lot more, like double-plus compared to DFA for some funds. Of course, if you want a max tilt without leverage--leverage not being prudent, practical, or cost-effective, IMO--then yes, you would have to go to certain funds to get it, but most people don't seem to want a max tilt, and other funds will do if one is willing to accept more market beta risk, even though I believe owning more of a less valuey fund has been a less efficient approach (in the Sharpe ratio sense) in the past than owning less of a fund that captures more of the potential premium. In any event, I do observe many posters here seem to tilt an insignificant amount.

arcticpineapplecorp. wrote:
Finally, I do think timeframe matters. If you're in your 20s and you can honestly say you won't stray one iota from your tilted portfolio over the next 40 years (who really can say honestly what they will or will not do over the next 40 years??), then go for it. But for many of us, we've come upon the research a little later in our working lives and by the time we're convinced of tilting, we're already starting the process of decumulating assets, or at least lessening the risk as we glide into retirement two decades or less and are increasing our bond portion, not our equity portion. And there has been evidence that over 20 year periods or less the tilting strategy hasn't made as big a difference as it would have over 40 years. I know Larry and/or Paul will say there's never been a 15 year period where this tilting strategy didnm't outperform "the market" but it's still a risk of underperforming the market and for some, that's not worth it. Better to know you're guaranteed to get the market, rather than possibly underperform it.That's my $.02 worth.

If you believe in diversification across factors, it makes sense to me to maintain that diversification throughout retirement. And if one employs a tilt with higher expected return to reduce overall risk by reducing the percentage of equities held, that strategy seems especially sensible in retirement, again, assuming one is a believer.

Gene Fama, whose research is a large part of the argument for tilting, says that the cap weighted market portfolio is always efficient and that tilting a bit is a matter of taste depending on individual circumstances. A recent example of his statements is in viewtopic.php?f=10&t=207562&newpost=3185432

Just to throw some gasoline on the fire:
1. If tilting is bad why then does EVERYONE tilt away from the investable assets in the world (equity/ bond/ other). You can't say I believe in market cap and then tilt towards U.S. just because it suits your needs and then use market cap as a reason to poo poo tilting. Or can you??
2. If tilting is wrong why then do people not think tilting to equities to capture equity risk premium is wrong. There is a long history of data to support small and value tilting as much/ near as much as the equity risk premium.

Good luck.

"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” |
-Jack Bogle

staythecourse wrote:1. If tilting is bad why then does EVERYONE tilt away from the investable assets in the world (equity/ bond/ other). You can't say I believe in market cap and then tilt towards U.S. just because it suits your needs and then use market cap as a reason to poo poo tilting. Or can you??

Tilting is with respect to one investable market. US total stock market by market cap is with respect to one investable market. International finance is becoming more unified but still globally equities are traded in many distinct markets. I'm not accusing you personally of anything, but the idea that failing to incorporate the total world's investable assets of all sorts, like tax liens, Tuvalu sovereign debt, and greasy wool futures (GW), means those who don't tilt within particular markets are hypocrites is nothing more than plain 'ol snake-oil sales. Writing the word everyone in all caps draws immediate suspicion.

staythecourse wrote:2. If tilting is wrong why then do people not think tilting to equities to capture equity risk premium is wrong. There is a long history of data to support small and value tilting as much/ near as much as the equity risk premium.
...

I'm still not accusing you personally of anything, but the everybody / nobody / wrong in all circumstances / right in all circumstances argument is exactly the right way to be kicked off a debate team. The reasoning signifies nothing.

<Off-topic speculation about staythecourse's reasons for expressing the question in the way s/he did was ill-advised so I edited it out, and if anybody read it please disregard it, and I apologize to staythecourse - PJW>

When gold was more expensive than it recently has been we saw many posts of the form if gold is so useless then why does blah blah blah. Nobody said gold is so useless. Some but probably not many have said tilting is bad, but many more have expressed their reasons for either not buying the argument, or thinking it's potentially better but choosing not to tilt anyway. My own reasons are twofold:

1) The claim that statistics show tilting is better is plain-out false. There isn't enough data to draw statistically-significant conclusions. One famous poster here and I clashed over it, and extracting the concession that there never was a t-stat being aimed for, which disqualifies the statistical analysis, was like I don't know what. It doesn't even meet a chosen-after-the-fact <0.05. All of this means statistics do not show it, and if we should tilt anyway just say so; and

2) Even if it is better, and isn't merely a matter of taking more risk to attain greater dispersion of potential results, the characteristics of my portfolio are already tailored to my own circumstances, so I choose not to tilt.

I don't criticize anybody else's choices. I only criticize the objectively false claim about statistics.

staythecourse wrote:2. If tilting is wrong why then do people not think tilting to equities to capture equity risk premium is wrong. There is a long history of data to support small and value tilting as much/ near as much as the equity risk premium.

Some may disagree but I don't see this as an apples to apples comparison. Stocks and bonds are fundamentally different asset types with different risk characteristics. This difference does not guarantee an equity risk premium over the short term but does give me fairly high confidence that I will get that premium over the longer term. On the other hand, tilts within the universe of stocks have less of a fundamental difference. This leads to a lot of debate on whether the small and value premiums are driven by inherently higher risk, investor behavior or some of both (a discussion started just a few days ago viewtopic.php?p=3179257). It also brings up questions about if/how easy access to these tilts with a proliferation of mutual funds has changed the system from the one that existed during the historical analysis. You may well get the tilt premiums over the 20 - 40 years talked about above but I think it's less certain than getting the equity risk premium.

Rowan Oak, I haven't seen it mentioned above so I'll add this. Unless do a significant tilt, the impact is small enough to bring up the question if it's worth the trouble. As an example, let's say the tilts over time will return an incremental 1% vs a market index. If I'm willing to risk 25% of my stock in tilting and have a 60/40 allocation, tilting will increase my total portfolio return by 0.15% (say from 4% real to 4.15% real return). This makes the assumption that I can tilt and not increase expenses or taxes. If I incur an increase in either, I end up lower than 4.15%. Ultimately this is one of the major reasons I chose not to tilt. I was unwilling to make such a large bet on the increased risk of tilting and a small bet is lost in the round-off and not worth the extra complication.

Rowan Oak wrote:This forum has been an immense help to my family, but I do find myself getting lost in all the debate over factor tilts/tilting away from market-cap weighting or anything that shifts a stock portfolio away from the closest possible representation of the total U.S. stock market or the global stock market as a whole. It seems like an endless argument with no good answer. I prefer simplicity, but to be completely honest I prefer simplicity because I really don't understand the debate. Is there any situation where one can reliably predict the future of a specific sector/value/growth/small/mid/large cap etc. of the market and beat the market overall? In other words, over the long term (5+yrs) am I better off just not worrying about all the debate and just trying to mirror the total stock market until the day I sell in retirement?

I'd either go Target Retirement or Taylor's 3 Fund and be done with it.